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Interest Rates Will Rise, Profits Will Fall

TAGS: USDA
Interest Rates Will Rise, Profits Will Fall
Specialist says he is confident in these two statements.

If you have a variable-rate loan, lock it in at a fixed rate while you can. That's the word from Mike Boehlje, Purdue University Extension ag economist. He's certain two things will happen in the short term. One of them is about interest rates.

"Interest rates are going to go up," he says. "They've already started increasing, and the feds are making it clear that is going to be the trend."

Peak period fading: Farming is all about cycles, Boehlje says. A period of very high profits over all costs is fading, and likely ended in 2013. Land will still be farmed in 2014, however.

In fact, between now and 2016, Boehlje believes interest rates will double. The only good news is that since rates are only now above historic lows, they will likely still be reasonable once they double. It could mean going from 2% today to 4% in the future. It will make a difference on payments and in cash flows, but it's nothing like the traumatic rate increases that occurred in the early 1980s, he says.

Interest rates were already much higher then, and went to as high as 21% before some people simply stopped borrowing money.  Boehlje isn't looking for that type of run-up in this situation unless something large and fundamental

Meanwhile, USDA says farm profits will decline over the same period by 20 to 25%. The decline, however, is from very high levels in the first place.

Boehlje and his colleagues think in terms of pure profit per acre with all costs, including fixed costs for equipment and labor. "It stayed fairly constant at around $50 per acre through the 1990s and through 1996," he observes. "Corn traded in the low $2 per bushel range."

Since 1997, Boehlje says pure profit per acre numbers have jumped from $150 to $200 to $250 per acre in many cases. That is pure profit.

"It's really not sustainable long-term," he says. "For 2014 it will likely be zero. So will you farm in 2014? The odds are that you will. If you earn a pure profit of zero in 2014, you will still likely pay variable costs and have some left over to put toward fixed costs."

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